Understanding PCPs and hire purchase

Personal contract plans (PCPs) have emerged as a popular ways to finance a new car. How do they differ from hire purchase (HP) plans?

Many car dealerships today rely on PCPs as a method for consumers to finance the purchase of a new vehicle.

However, there is often an air of mystery as to how they work and it is advisable that car buyers understand fully what they are committing to.

Car loans remain a popular method for buying a car but there is also the option of going for a HP plan too to ensure a simple, but effective path to ownership of a vehicle.

How do PCPs work?

If you’d like to change your car more often, or drive a newer car for lower monthly repayments, then a PCP may be the most suitable product for you.

There are three parts to a standard PCP:

  • The deposit
  • The monthly repayments
  • The final lump-sum payment which is called the Guaranteed Minimum Future Value (GMFV)

The deposit is the amount you want to pay upfront and can include your trade-in.

The monthly payments are mainly calculated over three years or 36 months. To calculate your monthly payments, the deposit and the GMFV are subtracted from the price of the car.

The amount left over plus interest is then divided over the term to form your fixed monthly payments.

The GMFV is what the minimum value of the car will be at the end of the agreement. It shows you what your final payment would be.

If you decided to keep the car, the GFMV is based on your anticipated mileage and likely condition of the vehicle.

Your monthly payment remains fixed for the duration of the agreement, so you can budget your outgoings

Buyers also get the flexibility to choose their deposit and anticipated kilometres driven.

At the end of the agreement you have three options.

  • Trade in the car for a new car
  • Pay the guaranteed minimum future value to own the car outright
  • Or, return the car to the dealership

How does hire purchase work?

If you would like fixed payments each month and to own your car outright at the end of the agreement, then hire purchase (HP) may be the most suitable product for you.

Here’s how it works:

  • Find the new or used car you want
  • Decide how much of a deposit you want to pay. You can even trade in your current car towards your deposit
  • The deposit is subtracted from the price of the car, interest is added and the balance divided over the agreed term. Your monthly payment remains fixed for the duration of your agreement.

So with HP you can budget your outgoings each month and you can hhave the flexibility to choose the deposit and term that suits your budget.

Once you have made all the monthly repayments you own the car.

Interested in buying a new car via HP or PCP then talk to your franchise dealer today.

John Kennedy
Award-winning ThinkBusiness.ie editor John Kennedy is one of Ireland's most experienced business and technology journalists.